Stated vs. Revealed Preferences in Pricing

Aug 25, 2015

Understanding the general concept of (and seeing the huge difference between) stated vs. revealed preferences helps make sense of common pricing tactics.

Stated preference (sometimes referred to as contingent valuation) is a survey-based technique for establishing valuations. The subject is asked how much they value something. The answer might be based on a lot of things, and it may be very different from their actual behavior.

Revealed preferences are, well, revealed, by studying the actual decisions people make. These may be very different – if not completely opposite from – their stated preferences.

Here is a very simplistic example of the concept. Someone might say that they only listen to NPR – National Public Radio is their stated preference. If however you pull up beside them and hear them singing along to Katy Perry you have discovered their revealed preference. Because this preference has been revealed not by taking a survey, but by observing their true behavior, it is much more meaingful.

A more typical example from economics would involve a resource that provides utility, but is not generally directly sold (and is therefore harder to value). For example a homeowner might say that they place a high value on the mature trees that line their street (their stated preference) but then refuse to pay a premium to replace their own dead tree with a more mature one. This, their revealed preference, indicates that they actually place a much lower value on mature trees than they claimed in the survey (their stated preference).

In the first example the subject was being deliberately misleading you – they were stating a preference that they believe casts them in a more positive light. But there does not have to be an attempt to deceive in order for stated preferences to be inaccurate.

The simple fact is that people often have a very poor understanding of what they really value and what truly motivates them. This is especially true when it comes to pricing.

For example many people will say that they think charm pricing, the practice of ending prices with the number nine, is stupid. They might even go on to say that they round prices up in their head.

The truth of course is very different – charm pricing is very effective. Most people do find charm pricing very compelling, usually rounding prices down to some extent. This reveals their true preference. Even though they truly believe that they are immune to the power of charm pricing their purchasing decisions reveal the opposite.

The same thing with anchoring – most people would truly believe they are not affected by anchor prices, but their actual buying habits reveal their true preferences.

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